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QUESTION

Sep 11, 2019

You have been asked by the President ofTim Hortons Inc.'s (TMI)(Click here to review the TMI Case

You have been asked by the President of Tim Hortons Inc.'s (TMI) (Click here to review the TMI Case

Study) to provide some consulting (advisory) service. Tim Hortons is considering opening its line of restaurants in China and is looking for a feasibility study that will include macroeconomic analysis and estimates of market potentials for THI products.

There is a strong interest from investors in Hong Kong because there are a large number of Canadians in that country. Hong Kong, a former British colony, operates as an autonomous state but it is part of China. Opening THI restaurants in China can be considered as a two-stage process: (1) first open in Hong Kong and then (2) move into China.

Hot on the heels of the success (or perhaps trying to show you can improve upon a less-than-satisfying performance) of your first foray into the assessment of macroeconomic conditions of a country (i.e., your research essay), you have decided to join forces with three of your peers to take it to the next level. You have formed a small consulting company and are bidding on a major project with a major client - Tim Horton's Incorporated (THI).

THI has issued a challenge asking for recommendations on whether they should or should not strengthen their investment in one of the fastest growing economies of the world: the People's Republic of China (China). Your team will consider the macroeconomic environment of China and its trends, and then examine the feasibility of establishing a formal presence for Tim Hortons within the boundaries of China. If you recommend that THI should enter this market, then you must also list the various steps that it should take to ensure its success. Should you recommend that the market is not suitable, then you must present a strong argument as to why.

As a further twist, your team will have some competition. Other teams will be given the same opportunity to prepare their recommendations on the same project using the same case study as a starting point, so you need to find a way to find, select, and package your information that will be the most engaging, creative, and persuasive. THI will hire the most convincing group to help them in the broader project.

Some questions to think about as you approach your research are:

Should you use Purchasing Power Parity (PPP) to get an idea of the buying power of the Chinese consumers?

How about the exchange, inflation, and interest rate? How do they have any bearing on your analysis?

How about the unemployment rate in China - how does it affect your analysis?

What are the expected price and income elasticities of demand for THI products in China?

Do you think that THI should modify its menu for the Chinese market? If so, elaborate on this.

Starbucks, McDonald's, and many other Western fast food chains are already in China. How these will affect THI's growth and success?

Work constructively and collaboratively in a small group to produce an engaging and informative package.

Data about the Chinese economy is available from various reputable internet sources including the World Bank, the International Monetary Fund (IMF), Mundi, etc.

Instructions

Overall, your team will study the case study provided and then conduct additional research on the country of China in order to get information to address the following questions:

How big is the Chinese market? What is the real GDP adjusted for Purchasing Power Parity?

What is the current state of the economy that you have chosen? Collect the latest available data on nominal GDP, real GDP, per capita real GDP, unemployment rate, inflation rate, interest rates, exchange rate(s), and any other important macroeconomic data.

How is this economy doing? What is the growth rate of the real GDP? What is the trend in this variable?

How fast is the per capita real GDP growing? This is an indication of the buying power.

Is the country experiencing an inflationary or a recessionary gap?

What kind of macroeconomic policy should this country follow?

Can you find the relevant data for the last couple of years or more?

At what stage of the Business Cycle is this country presently in? Is there an inflationary or recessionary gap?

What kind of fiscal and monetary policies is this country presently following? Expansionary or contractionary?

What is the price elasticity of demand for fast food in China? Is it elastic or inelastic?

How are the Western fast food companies doing in China? McDonald's, Starbucks, and KFC are here. Can Tim Hortons learn something from the experiences of these companies in China?

What is the Income Elasticity of demand for coffee and fast foods in Canada? Can we assume that in China the elasticities will be somewhat similar?

What other issues with regards to the social, political, labour, or environmental practices in China should be taken into consideration by THI?

Is it going to be easy to find skilled persons to work at THI?

Your ultimate goal is two-fold:

to provide the best evidence to support your recommendations to Tim Hortons company; and

to do so in the most compelling, informative, and creative way you can.

THI was founded in 1964 in Hamilton, Ontario, by Canadian hockey player Tim Horton. Tim Hortons franchises spread rapidly and eventually overtook McDonald's as Canada's largest food service operator. The company opened twice as many Canadian outlets as McDonald's and system-wide sales also surpassed those of McDonald's Canadian operations as of 2002. Tim Hortons commands 76% of the Canadian market for baked goods (based on the number of customers served) and holds 62% of the Canadian coffee market (compared to Starbucks, in the number two position, at 7%).

As of December 30, 2012, the company had 4,264 restaurants, including 3,436 in Canada, 804 in the United States, and 24 in the UAE and Oman. Tim Hortons' international expansion strategy has been categorized as careful and slow. In comparison, Starbucks, a U.S. based competitor, has been very aggressive in international markets for several years, and has already expanded into China.

However Tim Hortons' international presence has some interesting features. To provide moral support to the Canadian soldiers in Afganistan, it opened a restaurant on a military base outside Kandahar, Afghanistan. Two more outlets are located in military bases at Fort Knox, Kentucky, and Naval Station Norfolk, Virginia. Tim Hortons' other international expansions include a small outlet at the Dublin Zoo. Tim Hortons also made a deal with the Spar convenience store chain in the UK and Ireland, resulting in Tim Hortons coffee and donuts being sold at small self-service counters in many Spar stores.

Its busiest branch is located in Fort McMurray, Alberta; its location in Iqaluit is the northernmost store.

In November 2010, Tim Hortons extended Interac debit payment system acceptance to most of its stores. The company previously began accepting Interac in its stores in Western Canada in 2003 and, later, MasterCard and MasterCard Pay Pass across most of its stores in 2007. The company often indicated the delay of broader or wider electronic payment acceptance was to "ensure speed of service." In 2012, Tim Hortons began accepting Visa cards.

Twenty years ago, Tim Hortons used to sell mainly donuts and coffee but today it offers breakfast and lunch menus. Product lines have been diversified and the stores are getting better furniture and free Wi Fi. Investors in THI stocks have been rewarded very well.

China

Since initiating market reforms in 1978, China has shifted from a centrally planned to a market based economy and experienced rapid economic and social development. GDP growth averaging about 10% a year has lifted more than 600 million people out of poverty.

With a population of 1.3 billion, China recently became the second largest economy and is increasingly playing an important and influential role in the global economy.

Yet China remains a developing country and its market reforms are incomplete. In 2011, China's gross national income per capita of $4,940 ranked 114th in the world; over 170 million people still live below the $1.25-a-day international poverty line. With the second largest number of poor in the world after India, poverty reduction remains a fundamental challenge.

Rapid economic ascendance has brought on many challenges as well including high inequality, rapid urbanization, challenges to environmental sustainability, and external imbalances. China also faces demographic pressures related to an aging population and the internal migration of labor.

Significant policy adjustments are required in order for China's growth to be sustainable. Experience shows that transitioning from middle-income to high-income status can be more difficult than moving up from low to middle income.

China's 12th Five-Year Plan (2011-2015) forcefully addresses these issues. It highlights the development of services and measures to address environmental and social imbalances setting targets to reduce pollution, to increase energy efficiency, to improve access to education and healthcare, and to expand social protection. Its annual growth target of 7% signals the intention to focus on quality of life rather than pace of growth.